AN INTRODUCTORY COURSECOURSE INTRODUCTIONCORPORATE FINANCE:AN INTRODUCTORY COURSEDISCUSSION NOTESMODULE #11COURSE INTRODUCTIONNOTE TO THE READER: Reading these discussion notes should not be viewed as a substitute for attending class and carefully taking your own notes. These discussion notes represent an annotated outline of the material presented in class. While the notes are designed to cover most of the highlights of a given class, many of the more subtle points are "fleshed out" in the discussion as the result of questions that come up in class, or alternative ways that I find to explain the materials in "real time." Typically, additional examples will be covered in class. On the other hand, these notes may contain materials that I consider basic; some of the following discussion has not been formally covered in class. In combination, carefully reading the chapters, reviewing your own class notes, reviewing these discussion notes, and working and understanding the assigned problems and cases should provide you with an in-depth understanding of the materials in Corporate Financial Management. Good luck!I. COURSE OVERVIEW--PURPOSE AND FOCUSA. Carefully review syllabus, i.e., course objectives, learning goals, course prerequisites, course materials, library materials, course policies, grading guidelines, review sessions, and the course schedule/assignments.B. Use the balance sheet framework and a valuation framework to explain where we are going in MBAC 6060. The major topical coverage in financial management is the following:1) Financial Analysis and Planning,2) Capital Budgeting--The Long-Term Investment Decisions,3) Capital Markets, Risk Versus Return, and Asset Pricing,4) Capital Structure--The Financing Decisions, and we often highlight5) Working Capital Management--The Short-Term (Current) DecisionsBriefly elaborate on these topics in the context of the Balance Sheet Equation. Assets = Liabilities + Equity.In finance, we generally think of the value of assets, liabilities, and equity accounts based upon 1 These lecture notes presume the reader has completed an introductory financial accounting class and an introductory statisticsclass. In addition, while not absolutely essential, the completion of an introductory microeconomics class is helpful. Algebra isthe only math required to master the material in these notes. These modules are designed to complement the Berk and DeMarzo text, Corporate Finance: The Core, Pearson/Prentice Hall, ISBN 0321540093. Subsequently, references to this text will be indicated using the authors’ initials, B&D. This particular module is designed to complement Chapter 1 in B&D.1market values, not necessarily accounting (historical) values. Therefore, it is necessary to understand how the market prices both real and financial assets. To develop this understanding, we must understand how to measure risk; all other things equal, the higher the risk the lower the market value. Initially, we will implicitly consider risk without formally measuring it. Later, we will develop both a measure for risk and an equation that relates the measured risk to required returns and, ultimately, to prices.Back to the balance sheet format:Assets = B (for bonds) + S (for stock).Assets = B + SReal Assets = Financial Assets (tangible & intangible) (paper assets) $ Market Value = $ Market ValueDiscuss tangible (bricks and mortar) and intangible (human capital, reputation based, or perhaps an existing competitive advantage) assets. II. CORPORATE FINANCE DECISIONS- Financial Analysis and Planning:In this section we assess the strengths and weaknesses of the firm via the Statement of Cash Flow, financial ratio analysis, and common sized financial statements. We will look at the time-series performance of the firm, or trend analysis, and compare the firm to appropriate comparable firms. Finally, using the best available information, along with the firm’s goals and strategies, we will project financial statements into the future, or pro forma statements, to evaluate the consequences and feasibility of the firm’s goals and strategies. If the goals and strategies do not seem financially viable, we must cycle back and revise the firm’s goals and strategies, e.g., the firm’s sales growth rate objective. Important outcomes of this analysis will be forecasts of cash flows expected by the firm and a forecast of the required additional external financing.- Capital Budgeting:These decisions involve what long-term assets (fixed assets) the firm should acquire. Using our balance sheet model, these are “left-hand side” decisions. These decisions are 2the "investment" decisions. They determine the future generation of cash.In order to make these decisions, as well as the other basic finance decisions, an "objectivefunction" must be specified for the financial manager. By an objective function, I mean “what the manager wants to accomplish.” We then turn this objective into "rules" that the manager should follow in deciding what assets to acquire. We discuss possible rules for the financial manager below.To be properly made, the capital budgeting decision requires estimating the future cash flows that an asset will generate; either through revenue enhancement, cost reduction, or both. Once these future cash flows are estimated, we must place a value upon them, i.e., how much would we pay to receive this stream of cash flows?We will see that the value of any real asset, real or financial, is a function of three factors:- The size of the future cash flows,- The timing of these cash flows, and- The risk of these cash flows.Value = f (size, timing, and risk of cash flows). (f(.) means “is a function of.”)How would you predict that asset value would be influenced by these three factors, one-by-one? A preliminary answer to this question relies on common sense. We would expect an asset to be more valuable, everything else equal (ceteris paribus) if - its future cash flows are larger, - its future cash flows occur sooner, and - its future cash flows are less risky. A more complete or precise answer will take some development. We will devote a large portion of our efforts in the class on assessing these factors. See below for a sneak peek.Note that finance is preoccupied with cash flows, not accounting numbers, e.g., earnings per share. Cash is the life-blood of the firm! It takes cash to pay bills, make